Gov. David Paterson is proposing major cuts in education and health, but other in the capital hope a Wall Street rebound can stave off the state budget crisis.

New York is running out of cash. It is expected that the state's general fund will end the month of November in the red, forcing the government to borrow money from its short term investment pool in order to meet its scheduled payments.

And that isn't the biggest problem. The state faces an escalating deficit and Comptroller Thomas DiNapoli has estimated that New York could face a $38 billion dollar spending gap by 2013.

The message from Gov. David Paterson and his budget director, Robert Megna, has been clear: State spending has to be reigned in or New York will end up like California, a state that has had to issue IOUs and seen its credit rating cut to near junk bond status.

Paterson's way out of this mess, a deficit reduction package worth $5 billion, would make significant cuts to health care and education and provide for one-time influxes of cash into state coffers with a tax amnesty program and transfers from quasi-governmental public authorities.

This is not the first time Paterson has tried to reduce spending -- and indications are that he will, once again, meet opposition, Already representatives of education and health care groups have warned of disaster, and some senators have resisted the governor's call. Many, hoping to avoid slashing services, see salvation in reports from Wall Street promising bigger bonuses and higher profits in the finance industry in the months to come.

The Numbers

In December the state is scheduled to make $2.5 billion in payments for STAR, the property tax relief program, as well as $1.6 billion in School Aid Funding, $500 million in funding for city governments and $500 million in funding for county governments. According to current projections, it will have to borrow to meet those obligations.

Estimates of the state's long term fiscal crunch vary but they all paint a fairly dire picture. By the end of the year, the state's deficit is expected to reach anywhere from $3.2 billion to the $4.1 billion. The Paterson administration now predicts the state faces a deficit of $44.2 billion over the next two-and-a-half years.

A recent financial condition report issued by DiNapoli's office shows that state spending has increased by 21 percent over the last four years. Revenues have drastically decreased. And New York is the second most indebted state in the nation, behind only California.

Although DiNapoli's office warns the deficit will be $4.1 billion by the end of this year, the Department of Budget is proposing only $3 billion in cuts. Even so, when asked to preview his plan earlier this month Paterson said simply "Pain."

The Way Out?

For a number of sectors -- and for New York City -- pain is exactly what Paterson's plan delivers. More than two third of state spending goes to health care and education, so both sectors face hefty cuts.

Under Paterson's proposal, school aid would be reduced by $686 million this year. That translates into $223 million in cuts for the five boroughs. Paterson's plan also includes reductions in tuition assistance and cuts to the budgets of the city and state universities. CUNY tuition will increase from $4,000 a year for undergraduate students to $4,600. The state will reduce per-student aid to the college by around 10 percent.

The health care sector, including Medicaid and health service providers, will be cut by $471 million. AIDS programs and home care providers are also scheduled to for reductions.

The city would lose $41 million in Aid and Incentives Payments -- state assistance funding for municipalities that was just added in the 2008-2009. The city will still receive a payment of $205 million for 2008 '09.

"It's not clear yet how the city will absorb the cuts," said Doug Turetsky of the city Independent Budget Office, adding, "The thing to keep in mind is that there is a hit directly to the city budget, and then cuts that don't flow through the city budget that hit non-profit organizations and cut services that we don't measure."

Others are more certain about how the plan will affect the city and the state.

James Parrot of the Fiscal Policy Institute said Paterson's plan is potentially disastrous for New York's economy. Parrot estimates that the state could lose 25,000 jobs if the cuts to education and health care funding go through. He said the job loss will not "prime" New York's economy, as Paterson has said his cuts will do, but hurt it.

E.J. McMahon, director of the fiscally conservative Empire Center for New York State Policy, sees things much differently. McMahon said that Paterson's cuts should only be the first of many. "He keeps talking about this December," said McMahon. "This is just the beginning."

Is There Another Way?

Most observers would like to see an alternative to cuts -- and some think there may very be one.

Parrot wants Paterson and the legislature to wait until the end of the fiscal year before making any drastic cuts to see if revenue collection improves. "The way to address the cash flow problem in December is to borrow short term 'til the end of the fiscal year," said Parrot, who further suggests the state tap into its rainy day funds to get through December.

Paterson, though, has insisted that he does not want to tap the state's rainy day funds or do anything that might downgrade the state's financial rating.

Parrot believes borrowing short term will not hurt the state's financial rating, and he notes that short-term interest rates are low. "It's foolish not to do it," he said. Parrot also expects the federal government to continue the stimulus program that has sent cash directly into the state budget.

McMahon disagrees. "It gets worse after this," McMahon said. He thinks those who expect Washington to extend the stimulus are dreaming and playing dangerous games with the state's finances. He said the state will see stimulus funding drop off and be left with even larger deficits.

Looking to Wall Street

The collapse on Wall Street helped get the state into its current mess. So can the improved situation in the finance industry save the state? Parrot said he expects tax collections to improve by January, spurred by expected bonuses on Wall Street. "There has been a quick recovery on Wall Street. It is clearly much better than it was last year. I would want to wait to see the collections," said Parrot.

Others agree. "I think it would be prudent to wait and see what happens at the end of the year with Wall Street," said Billy Easton of the Alliance for Quality Education. "You hear everyday about executives getting bonuses that could offset fiscal problems."

Mayor Michael Bloomberg has said that he expects Wall Street to help bolster the city budget.

State officials though, do not share that optimism.

Matt Anderson, spokesperson for the state budget office, said that early indications are that the bonuses and money from Wall Street will not be significant enough to dig the state out of its financial hole. "The rebound is a good thing, but we are tempering our enthusiasm when it comes to bonuses," said Anderson.

Anderson pointed out that a number of firms that paid bonuses last year no longer exist, At the same time many firms have been paying bonuses in stock, which does not send money into the state's coffers.

The budget office is expected to release a revenue update this week, and, Anderson said, "There isn't much sign for optimism for a rapid rebound."

"You'd need $20 billion in bonuses for it to make a difference," said McMahon, who warned that the state can't delay making significant budget cuts.

DiNapoli's office agrees.” Although we are seeing encouraging signs on Wall Street and there have been recent news reports suggesting a rebound in compensation, it is important to note that the securities industry is undergoing a fundamental transformation, which could result in reduced profits and therefore less tax revenue," said Robert Whalen, spokesman for the comptroller's office. "Simply put, New York cannot count on Wall Street to save the day. Further delay will only make matters worse."

"Through the lens of the city budget, Wall Street profitability certainly spells good news," said Turetsky," but he noted that Wall Street has been "extremely volatile."

Even some state senators who oppose Paterson's cuts remain skeptical about a rescue from Wall Street.

"We hope it will continue," Austin Shafran, spokesman for the Senate Democrats said of the rebound, "but it usually takes a while for the public sector to catch up with the private sector. It does not take away from the need to come up with a balanced budget."

The Political Picture

Paterson has staked his governorship on a fiscally responsible message. He has repeatedly mentioned how hard it is for him to cut education and health care but reiterated that the state's fiscal situation demands it.

It seems the majority of the New York Assembly would go along. The Assembly held hearings this month and then issued a report basically agreeing that the state's finances are in disarray. Sources say they are ready to act if they have assurances the Senate is on board.

Senate Democrats, who are concerned with retaining their majority in 2010, have seemed less ready to commit to Paterson's cuts. A number of senators have indicated that they would at least like to take their time before slashing the budget. Some have even indicated privately that they feel Paterson has blown the state's financial peril out of proportion. They defer to the message delivered by representatives of health care and education groups who would bear the cuts.

After overseeing two public hearings, Senate Finance Committee Chair Carl Kruger issued a statement attacking Paterson's plan. Kruger indicated that he agreed with Paterson's proposal to raise funds by cutting spending at state agencies and by transferring funds from authorities, but he slammed the reductions in health care and education.

"Dramatic reductions to higher education opportunity programs for low-income students and developmental disabilities services are poorly devised ideas passed off as solutions," he said in the statement. "Also, the governor’s Medicaid and healthcare cuts place disproportionate pain on hospitals and nursing homes given they have weathered a number of cuts already. We have to do better, and those who do not recognize that responsibility lack the imagination or inclination to come up with new answers to old problems."

Following a hearing on the cuts on Long Island, Sen. Bill Perkins said he was impressed that about half members of the audience stood up to protest cuts to education. Perkins said representatives from the hospitals in his upper Manhattan district have stressed what Paterson's proposed cuts would mean to health care services. "In that respect, service cuts are going to be very hard on the community," he said.

Perkins said that he had no doubt that it is important to make budget cuts in a timely fashion but said that he needed more information and time to decide how to go forward. "There is no question about the urgency, but it's most important that the cuts we make to fill our budget shortfall are done fairly," he said.

Shafran echoed Perkins' sentiment. "What is most important is for us to get it right," he said. "People have been critical in the past, and rightly so, that we were not open to the public with the scope of the deficit â€¦. This deficit is not just for the legislature; it is for every man and woman in New York, and they must have their say."

Looking for Revenue

In the meantime, some senators and advocates from the healthcare and education sectors have urged the state to look for alternate short-term revenue until revenues improve.

Paterson's office says that 95 percent of school districts have rainy day funds that could more than cover the cuts he has proposed. He has suggested that school districts offset cuts in state aid by tapping into those funds. Easton counters that a number of New York City districts do not have rainy day funds at all. Instead, he suggests the state tap into its own rainy day fund. Brian Conway, vice president of media relations for the Greater New York Hospital Association, said his industry understands the state's financial peril.

"We don't have our head in the sand at all as far as the state's fiscal situation goes," said Conway, "No one has sacrificed or given more."

He warned, though that if Paterson's cuts go into effect people can expect hospital care to deteriorate greatly. "We are not crying wolf. We are warning this will happen. Layoffs, reductions in service and possible closure." Conway said the recent closure of two Queens hospitals would look "tame" in comparison to the havoc Paterson's proposed new cuts will wreak on health care in New York City.

Moment of Truth

Paterson has pressed the legislature for months to come to a special session to propose their own cuts or to vote on his. Eventually, Paterson pushed back his requested dates to Nov. 10 to allow the Senate and Assembly to hold their hearings. "I think we will be there," one senator said, "The question is will we have an agreement."

Paterson plans to address both houses of the legislature on Nov. 9 to discuss the state's financial problems. That appears to some to be a last ditch effort to lead a group of legislators who have proven this year to be un-leadable.

At a leaders’ meeting in the governor's New York City office on Thursday, Paterson seemed to reach a breaking point. Senate Conference Leader John Sampson repeatedly expressed how important it was for his caucus to hold public meetings and hear from average New Yorkers.

Paterson reacted sharply. "In the state of California they heard from the people in that state. They had a referendum about what they would cut, and they got nothing -- except the legislators' salaries." Paterson then added, "Anybody who tries to, in any way, differentiate or confuse this issue is not serving the public."

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